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Patient Cost-Sharing Innovations: Promises and Pitfalls

Issue Brief No. 75January 2004
Sally Trude, Joy M. Grossman

Over the next decade, health plans and employers will refine patient cost sharing to
encourage workers to seek more cost-effective care, according to a panel of market
and health policy experts at a Center for Studying Health System Change (HSC)
conference. Instead of using a single, large deductible, employers and health plans
will likely vary patient cost sharing by choice of provider, site and type of service, so
patients choosing less effective care options pay more. Employers also will try to
limit financial hardships for low-income workers by, for example, varying cost
sharing based on workers income. However, significant obstacles could hinder the
effectiveness of emerging cost-sharing strategies, including inadequate information
on quality of care and provider resistance.

Patient Cost-Sharing Trends

o slow health insurance premium
increases, employers in recent
years have increased patient cost
sharing through higher deductibles,
copayments and coinsurance.
Nationally, employers are estimated
to have raised patient cost sharing to
reduce average health insurance
premiums by 2 percent to 3 percent
in 2002 and an additional 3 percent
in 2003.1

Panelist Arnold Milstein, M.D.,
national thought leader at Mercer
Human Resource Consulting, said
employers enthusiasm for cost sharing
stems from two main desires: to restore
patient cost sharing to comparable levels
before the advent of managed care or
to give workers a greater financial
stake in care decisions through higher
out-of-pocket costs.

Switching from a $5 or $10 copayment
to coinsurance, where patients
pay a percentage of the total cost of
care, will capture patients attention
quickly, said Robert Berenson, M.D., a
senior fellow at The Urban Institute.
"It was only when I went from copays
to coinsurance when I changed jobs
recently that I really understood the
price of the drugs that I was being
asked to pay for," he said.

Helen Darling, president of the
National Business Group on Health,
said employers are increasing cost
sharing to get workers attention
about the large increases in total
health care costs, and if steps arent
taken to rein in spending, people will
lose coverage. "We will have vastly
more people with no coverage
because employers cant afford to
provide coverage without cost
sharing," she said.

How far and how fast employers
increase cost sharing will depend on
the strength of the economy and the
pace of rising health care costs. In a
slow economy amid rapidly rising
health costs, employers will risk
employee rancor by aggressively
increasing cost sharing but will back
off when the economy improves and
labor markets tighten,Milstein said.

Refinements Ahead

ncreased patient cost sharing can be
a powerful—but blunt—tool to raise
patients awareness of the true costs
of care. As the move toward higher
patient cost sharing continues,
employers and health plans will refine costsharing
approaches,Milstein said.Without
refinements, patients will cut back on both
needed and discretionary care when faced
with higher out-of-pocket costs.2 As a result,
seriously ill and low-income workers may
face financial and medical hardships.3 "This
refined approach to cost sharing—where
patients are given incentives to select more
cost-effective and higher-quality options—is
likely to predominate in the longer term,
because it prevents much of the unintended
negative consequences of higher cost sharing,"
Milstein said.

Still stinging from the managed care
backlash, most employers are likely to
increase cost sharing while maintaining
broad patient choices, said John Bertko,
senior actuary of Humana Inc. As cost
sharing increases, plan designs will grow
more complex, and consumers will have to
shoulder more responsibility for identifying
and making cost-choice trade-offs.
"Consumers are going to have to do more
work to find out where the best site for them
is and where the most affordable care is,"
Bertko said.Milstein predicted the biggest
bang for the buck will come from varying
cost sharing by patients choice of provider,
participation in disease management and
wellness programs, and choice of where and
what care they receive.

HSC President Paul Ginsburg pointed out
that these are the same opportunities for
efficiency gains that managed care was
expected to capture but that patients rebelled
against. "The same thinking is going on here,
but always through incentives and letting the
patients choose, hopefully with the support
of their physician," Ginsburg said.

Cost-Sharing Innovations

oing forward, employers are likely to adopt
layers of deductibles, copayments and
coinsurance instead of offering health plan
options with a single, high deductible,
according to Bertko and Milstein. Degrees
of patient cost sharing will be tied to choice
of provider, the site of service and the type
of service. These innovations will include
cost-sharing tiers to encourage patients to
use the most efficient hospital and physician
networks. Higher copayments and coinsurance
will be specific to the site of care, for example,
with lower out-of-pocket costs to encourage
physician office visits—where care is less
expensive and better coordinated—and
higher patient cost sharing for hospital
emergency department visits. Patient cost
sharing also will vary by type of service.
Imaging services, for example, might have
higher cost sharing than office visits, with an
aim of reducing inappropriate use of new
technology, according to Bertko.

In the past, potential cost savings depended
on workers annual choice of a health plan.
Innovations in patient cost sharing, in contrast,
emphasize choice at the point of service and
do not require a yearlong commitment by
the patient. For many common decisions,
such as a choice of drugs, providers and
some services, a patient could first choose a
lower-cost option but switch to the higher
cost option if dissatisfied. For example, a
patient might choose between a less costly
X-ray and more expensive magnetic resonance
imaging (MRI) for a joint problem.

To design cost-sharing tiers for provider
networks, health plans are developing
increasingly sophisticated measures of cost
and quality to rank providers based on
efficiency—providers ability to provide
quality care at a lower cost. Instead of
depending solely on the number of service
units used, such as radiology and other
diagnostic tests, efficiency measures will
reflect average service provision per patient
over longer time periods or an episode of
illness. In addition, a health plan might
define a tier consisting of providers in the
top 25 percent of efficiency and quality.

In addition, tiered-provider networks
may become service specific, according to
Bertko. Currently, health plans tend to contract
with hospital systems for their full range of
services despite the fact that one hospital
system may excel at cancer treatment while
another excels at cardiovascular care. In the
future, health plans may match tiers and
cost-sharing arrangements to specific hospital
systems and types of services, similar to
current centers of excellence.

Health plans also are improving the
information available to consumers, such as
what is available on Web sites like Aetnas
Health Navigator and Humanas Wizard.
These data sources allow consumers to identify
providers within particular geographic areas
and find hospital quality information, including
rates of surgical complications and hospitalacquired
infection rates. Because of contractual
arrangements with providers, health plans
cannot post price information but can provide
broad rankings similar to dollar-sign ratings
used to classify restaurants to give consumers
insights into cost differences.

Health plans also are developing tools to
help patients make cost-effective choices on an
ongoing basis. For example, Bertko described a
Humana program where the health plan scans
a prescription drug claims database to look for
patients who have a choice of either a lower-cost
brand drug or a generic drug. Through an
interactive voice response system, a computer
calls patients and explains that the person can
save money by taking a substitute drug.Humana
found that 19 percent of these automated calls
prompted patients to move to a lower-cost drug.

Tying Cost Sharing to Income

f employees choose a less cost-effective option,
employers will pass on almost all of the additional
cost associated with that choice, Milstein
predicted. To temper concerns that lower-income
workers may be unduly penalized, employers
may vary cost sharing by income. One approach
would be for employers to set maximum annual
out-of-pocket spending limits based on income.
Darling noted that employers used to have different
cost sharing for hourly and salaried
workers, but those distinctions disappeared
under managed care where there was little or
no cost sharing. As cost sharing increases,
companies are likely to reintroduce earninglevel
differentials.

However, how to establish cost-sharing
differentials based on earnings may be somewhat
complicated. For dual-income households, the
family income may be a better measure than
the employees earnings, but this information
is unavailable to employers. Bertko noted that
small employers are unlikely to introduce costsharing
differentials based on earnings because
the firms owner—the person establishing the
benefit—would likely face the highest cost
sharing. Also, small firms typically dont have
the payroll systems to administer these types
of options.

Federal tax policy also could be revised for
low-income workers who face financial and
medical hardships when employers move
aggressively to higher cost sharing without
adequate financial protections. Karen Davis,
president of The Commonwealth Fund, suggested
that income-related tax credits could
replace the current tax deduction for medical
expenses that exceed 7.5 percent of adjustedgross
income. She suggested a tax credit of 75
percent to 90 percent of expenses over 10 percent
of income for those with low incomes.

Patient Education Challenges

espite employers interest in patient cost
sharing, the panelists agreed that the infrastructure
for supporting patient decision making is
still under development. "We would hope that
we could get better at communicating the
complexity and also getting peoples attention
to realize that they have to be active consumers,"
Darling said. Likewise, Berenson noted that "if
we go into patient cost sharing in a big way,
there needs to be a lot more informed consent
from physicians to patients about trade-offs.
Prices would need to be much more transparent
than they are now to permit informed decisions."

In addition, measures needed to assess
and compare the quality of care provided by
individual physicians remain "at an extremely
rudimentary state of development,"Milstein
said. The next step will be to determine overall
rates of compliance with evidence-based
guidelines from administrative data. Bertko
raised concerns that having too few claims for
each physician may prevent health plans from
profiling individual physicians reliably except in
markets where the health plan has substantial
market share. Giving health plans access to
Medicare physician-level claims data, unavailable
to the private sector since 1984, would "go a
long way to solving problems of low sample
size that plague physician-profiling efforts,"
Milstein said.

Bertko also noted that health plans currently
can measure cost of care by episodes, but that
"quality measures are still emerging." He
recommended an incremental approach that
uses available measures of provider efficiency,
adding quality measures as they are developed
instead of waiting for perfect data and
measures.

Some panelists were concerned that forcing
patients to make cost-choice trade-offs at the
time they need care would always be a problem
because patients might be too sick to make an
informed choice. "A patient may know they
have heart disease, but one provider may
have the best record for heart failure, while
another has the best record for coronary
disease," said Mark Chassin, M.D., chairman
of the Department of Health Policy at Mount
Sinai School of Medicine in New York.Milstein
was more optimistic that education could
occur earlier for people at risk, such as when
they are first diagnosed with a heart condition.
Patients could learn about the differences in
efficiency and quality across hospitals before
needing hospitalization.Milstein described
how employers use of financial incentives for
centers of excellence has significantly increased
patients use of them for organ transplants.

Aligning Provider Incentives

roviders also will play a crucial role in
cost-sharing innovations. As cost sharing
increases and becomes more complex,
patients will look to their practitioners for
guidance in making cost-effective medical
decisions. Patients will need to talk with their
caregivers about cost-sharing requirements
and their ability to pay.

"The new ideas about cost sharing would
promote prevention and reduce discretionary
and overused services, circumventing some of
the distortions in utilization and charges we
saw under traditional insurance," Berenson
said, cautioning, however, that while cost
sharing has worked well for prescription
drugs, cost sharing in the doctors office is
more complicated. For example, to collect
coinsurance, the physician must know up
front how much the health plan will pay for
a particular service. Bertko countered that
one health plan is developing technology
that would allow physicians to determine a
patients cost-sharing requirements as simply
as swiping a credit card.

Furthermore, the effectiveness of
cost-sharing innovations may be limited by
providers own financial incentives. At the
same time that the pendulum is swinging
back to higher cost sharing, provider payment
trends are returning to fee-for-service
arrangements, creating financial incentives
for practitioners to provide more services.

Davis noted that the current system of
hospital payment leads to an expansion in
capacity for profitable services and that "if
Medicare would tackle this," there would be a
ripple effect through the private sector as well.

"There are enormous economic disincentives
for providers to invent ways to reduce
overuse. Theres absolutely no reason in favor
and every reason against a hospital figuring
out how many bypass surgeries are totally
inappropriate and getting rid of them,"Chassin
said. Employers and health plans need to
work to align cost-sharing innovations with
efforts to change provider payment incentives
through such measures as pay for performance,
where providers receive bonuses for meeting
certain quality standards.

"We do not have economic incentives that
reward excellence," Chassin said. "Instead we
have a completely fragmented and multidirectional
set of incentives from different payer
groups that act in different ways on different
parts of the delivery system."

Physicians also remain reticent about
sharing information on the quality or cost
of care they provide. "In terms of the quality
of their own care, 7 percent of physicians
think their quality data should be made
available publicly," Davis said.

Panelist Quotes

"The good news is were on the way to being able to identify the
high-quality, efficient providers...but were not quite there." —John
Bertko, Humana

"We assume that health care choices are interchangeable commodities
like cell phones, when in fact, they are probably not." —Robert
Berenson, The Urban Institute

"If employers thought they could rely on professionalism or tighter
managed care or government regulation to reduce health care costs they would
happily do so." —Arnold Milstein, Mercer Human Resource
Consulting

"Its wrong to push patients around with big economic incentives
at the point of care when theyre sick and most vulnerable."
—Mark Chassin, Mount Sinai School of Medicine

"The real improvement in quality is going to come from physicians
or hospitals changing how they practice when they lose patients or are embarrassed
because of the low scores theyre getting." —Paul Ginsburg,
HSC

"We need cost sharing to at least change some of the incentives within
the system." —Helen Darling, National Business Group
on Health